Tuesday, December 13, 2022
Homebuilders using mortgage rate buy-downs to boost sales
By Thor Kamban Biberman
While mortgage rates have declined somewhat in recent weeks, they are still about twice what they were a year ago. Given that reality, a new John Burns Consulting report said some homebuilders are considering mortgage rate buy-downs to help buyers get into homes.
According to the report authored by John Burns Senior Vice President Jody Kahn, and Senior Manager Devyn Bachman, prospective buyers should plan to visit the new home sales offices to learn the power of rate buy-downs to make monthly payments more affordable.
In early December, 75 percent of nationally surveyed homebuilders said they are buying down at least some mortgages, the John Burns report found.
“Our survey indicates 32 percent of (surveyed) builders are buying down the full 30-year term and another 30 percent of builders are temporarily reducing the rate for the first two years of the mortgage,” the report stated.
Builders pay these costs up front, effectively reducing monthly payments by prepaying for some of the buyers’ interest on the loan, according to John Burns. Few resale sellers are offering these savings to prospective buyers, however.
Two popular strategies involve builders lowering the mortgage rate for the buyer.
One is the 30-year rate buy-down: In this scenario, builders are contributing 5 percent to 6 percent of the home purchase price up front to lower the 30-year mortgage rate by 1 to 2 percent. For example, builders may reduce the rate from 6.5 percent to 5.0 percent using the Freddie Mac mortgage rate at the beginning of December.
Another vehicle is a 2-1 temporary rate buy-down. Under this program, builders are contributing 2 percent of the home purchase price up front, which lowers the first-year mortgage rate by 2 percent and the second-year mortgage rate by 1 percent.
Michael Sabourin, president and chief operating officer of Cornerstone Communities, said his company is offering such a buy-down program.
Using the example of a $750,000 home in Santee where a buyer is putting 20 percent down, or $150,000, the loan amount is $600,000. With principal and interest, Sabourin noted the monthly payment at 6.75 percent today would amount to $3,891.
With a buy-down that brings the interest rate to 4.75 percent in the first year, instead of the principal and interest tally of $3,891, the figure comes down to $3,129-per-month.
“We recommend that homebuyers use the savings for their closing costs,” Sabourin said.
The interest rate would only drop 1 point to 5.75 percent in the second year, which would bump the principal and interest payment to $3,501. The interest rate would bounce back up to 6.75 percent in years three through 30 until and unless the home was refinanced at a lower rate.
“Four years (in the home) is about the break-even point,” Sabourin said.
A mortgage rate buy-down isn’t a panacea. Borrowers would still have to qualify at a minimum rate in the first few years, but the program can give them some breathing room to pay those closing costs, or perhaps spend money on furniture or other needed items.
Because buyers have to qualify at the highest rate that will occur during the 30-year term, builders using the 2-1 temporary buy-down still told John Burns Consulting some buyers still couldn’t qualify. By shifting to a 30-year-rate buy-down, builders can lower the rate and monthly payment and help qualify struggling buyers.
The John Burns report said that whether the homebuilders like it or not, and despite the strong demand for existing homes, at least some kind of incentives have become a necessity in today’s new home sales environment.
Restrictions exist. For example, rate buy-downs must be for a home purchase, and not a home refinance, and there may be many uncertainties.
The Burns report noted that the dollar amount the builder pays for the buy-down can vary wildly by loan amount, the buyer’s down payment, type of loan, and the term of the buy-down, ranging from a low of roughly $6,000 to as high as $48,000.
Furthermore, lenders making jumbo loans, which are not federally guaranteed, may themselves restrict buy-downs by applying their own guidelines.